Because Mainstream Personal Finance Advice Is Not What It Should Be

Saturday night before last, Suze Orman issued yet another directive to her followers about credit cards. Readers may recall that back in March Suze told us that we should make only the minimum payments on our cards until we had an emergency fund equal to eight months’ expenses built up. That inspired one of my many unsuccessful business ideas.

Well, March was a long time ago. Stock and house prices are up, the recession has ended, and it even looks like the unemployment rate has crested. So I guess it is time for Suze to change strategies once again. This time the idea is to drop the cards. "Let’s go back to the times when you literally paid cash for everything. That’s right. Cash. Stop using your credit cards altogether.”

Apparently, this new approach was inspired by a wave of credit card companies raising interest rates, even on Orman’s show’s director’s wife. The nerve! As Teresa Mears at SmartSpending put it "Why do business with companies that treat you badly?"

Since when is raising prices treating customers badly? Sometimes prices need to go up because the cost of providing a good or service goes up. Nobody is happy about it. At least the credit card companies (generally) send a polite letter, which is more than I can say about the gas station or the supermarket.

And of course, the cost of providing credit card services is going up with the implementation of the credit card act that Congress passed earlier this year. That the fairly obvious consequences of the law are apparently a shock to so many tells us a lot about the level of money common sense in America.

As I have mentioned several times here, there are aspects of the argument against credit cards that I just can’t relate to. Plastic vs. cash seems like a no-brainer to me. Plastic is easier, more flexible, and often cheaper. Credit vs. debit also seems easy. Credit is, again, often cheaper, usually gives a short term and interest free loan until the end of the month, and has the option of allowing you to carry a balance at interest into future months.

Of course, I acknowledge that what I consider to be an option others consider a curse. Apparently I am part of a small gifted minority of people with the emotional control to charge only what they can pay off at the end of the month. Reading and listening to gurus like Orman and the other sources of mainstream personal finance advice reinforces the idea that people like me are freaks, not to be taken seriously, and certainly not to be considered as a viable model for others.

Turns out, we pay-in-full-every-month types are a minority, but hardly a lunatic fringe. According to a useful page of statistics at CreditCards.com, 74.9% of American families had credit cards in 2004, and 42% of those did not carry a balance. Put another way, only 43.4%, less than half, of American families owed money on credit cards.

I would be the first to argue that 43.4% is way, way too high. Most of those people are acting foolishly in one way or another. But the flip side is that quite a lot of people, presumptively of normal intelligence and typical levels of emotional stability, seem to be able to resist the sinister temptation to borrow at high rates. Is it possible that the ranks of these non-borrowers could increase? That more people could grow up, get their acts together, and just spend less and pay the bill in full each month?

For Orman, and the many like her, the answer to that question is of course not. Her response to higher interest rates is not just to not borrow, but to not use this ubiquitous convenience that will undoubtedly tempt you into borrowing. She takes as an unspoken given that you are incapable of acting like that ultra-capable elite that pay off their cards every month.

(An elite which, we presume, she herself belongs to. It is a cliché of Orman-bashing that she does not follow her own advice. I don’t criticize her for that, as her financial situation is far from typical. I do criticize her for not acknowledging that her advice is inappropriate for quite a few people, herself included.)

I am not a devotee of positive thinking, but I think it is within the realm of reasonable that repeatedly telling people they can’t do something may decrease the likelihood that they will try. When Orman et al. are routinely dismissive of the idea that there is any way to use credit cards other than to carry a high interest balance, it reinforces the perception that that is the normal thing to do. Her challenge to attempt to switch to cash only digs the hole deeper. By encouraging her viewers to find out just how tiresome life without plastic would be, she encourages them to quickly return to the "normal" way of life.

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.